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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
----------------- ------------------
Commission File Number 0-23817
-------
NORTHWEST BANCORP, INC.
------------------------
(Exact name of registrant as specified in it charter)
United States of America 23-2900888
----------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
Liberty Street at Second Avenue, Warren, Pennsylvania 16365
- ----------------------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
(814) 726-2140
--------------
(Registrant's telephone number, including area code)
Not Applicable
---------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Common Stock ($.10 par value) 47,677,284 shares outstanding as of April
30, 2003.
NORTHWEST BANCORP, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
March 31, 2003 and June 30, 2002 1
Consolidated Statements of Income for the three months and
nine months ended March 31, 2003 and 2002 2
Consolidated Statements of Changes in Shareholders' Equity for
the three months ended March 31, 2003 and 2002 3
Consolidated Statements of Changes in Shareholders' Equity for
the nine months ended March 31, 2003 and 2002 4
Consolidated Statements of Cash Flows for the three months and
nine months ended March 31, 2003 and 2002 5
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29
Item 4. Controls and Procedures 30
PART II OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Changes in Securities 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 35
Certifications 36
ITEM 1. FINANCIAL STATEMENTS
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
March 31, JUNE 30,
ASSETS 2003 2002 *
----------- -----------
CASH AND CASH EQUIVALENTS $ 47,456 64,687
INTEREST-EARNING DEPOSITS IN OTHER FINANCIAL
INSTITUTIONS 284,496 153,067
MARKETABLE SECURITIES AVAILABLE-FOR-SALE
(AMORTIZED COST OF $646,276 AND $426,160) 656,548 435,723
MARKETABLE SECURITIES HELD-TO-MATURITY
(MARKET VALUE OF $667,055 AND $398,891) 659,744 396,503
----------- -----------
TOTAL CASH, INTEREST-EARNING DEPOSITS AND
MARKETABLE SECURITIES 1,648,244 1,049,980
MORTGAGE LOANS - 1 TO 4 FAMILY 2,093,005 2,016,999
COMMERCIAL REAL ESTATE LOANS 351,031 304,456
CONSUMER LOANS 659,825 617,225
COMMERCIAL BUSINESS LOANS 125,774 95,968
----------- -----------
TOTAL LOANS RECEIVABLE 3,229,635 3,034,648
ALLOWANCE FOR LOAN LOSSES (25,346) (22,042)
----------- -----------
LOANS RECEIVABLE, NET 3,204,289 3,012,606
FEDERAL HOME LOAN BANK STOCK, AT COST 34,663 23,702
ACCRUED INTEREST RECEIVABLE 19,693 19,738
REAL ESTATE OWNED, NET 3,851 5,157
PREMISES AND EQUIPMENT, NET 61,149 55,374
GOODWILL 76,206 71,236
OTHER ASSETS 83,208 67,742
----------- -----------
TOTAL ASSETS $ 5,131,303 $ 4,305,535
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
NONINTEREST-BEARING DEMAND DEPOSITS 183,603 176,243
INTEREST-BEARING DEMAND DEPOSITS 640,222 429,339
SAVINGS DEPOSITS 1,419,062 1,106,310
TIME DEPOSITS 1,926,028 1,881,230
----------- -----------
TOTAL DEPOSITS 4,168,915 3,593,122
BORROWED FUNDS 483,162 259,260
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE 17,601 21,065
ACCRUED INTEREST PAYABLE 4,153 5,169
OTHER LIABILITIES 11,787 11,279
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S
JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES 99,000 99,000
----------- -----------
TOTAL LIABILITIES 4,784,618 3,988,895
SHAREHOLDERS' EQUITY:
COMMON STOCK, $.10 PAR VALUE: 100,000,000 SHARES
AUTHORIZED, 47,659,933 AND 47,549,659 ISSUED
AND OUTSTANDING, RESPECTIVELY 4,766 4,755
PAID-IN CAPITAL 72,423 71,838
RETAINED EARNINGS 262,819 233,831
ACCUMULATED OTHER COMPREHENSIVE INCOME:
NET UNREALIZED GAIN/ (LOSS) ON SECURITIES AVAILABLE-
FOR-SALE, NET OF INCOME TAXES 6,677 6,216
----------- -----------
346,685 316,640
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,131,303 4,305,535
=========== ===========
* - Adjusted for adoption of SFAS No. 147
See accompanying notes to unaudited consolidated financial statements
1
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, SEPTEMBER 30,
2003 2002 * 2003 2002 *
-------- -------- -------- --------
INTEREST INCOME:
LOANS RECEIVABLE $ 56,679 57,181 172,254 171,156
MORTGAGE-BACKED SECURITIES 7,099 6,491 19,966 20,286
TAXABLE INVESTMENT SECURITIES 2,421 2,575 7,178 8,653
TAX-FREE INVESTMENT SECURITIES 2,179 1,720 6,076 4,591
INTEREST-EARNING DEPOSITS 889 816 2,974 2,411
-------- -------- -------- --------
TOTAL INTEREST INCOME 69,267 68,783 208,448 207,097
INTEREST EXPENSE:
DEPOSITS 26,405 29,185 83,405 100,973
BORROWED FUNDS 7,405 5,306 20,881 12,951
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 33,810 34,491 104,286 113,924
NET INTEREST INCOME 35,457 34,292 104,162 93,173
PROVISION FOR LOAN LOSSES 2,294 1,664 6,120 4,555
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 33,163 32,628 98,042 88,618
NONINTEREST INCOME:
SERVICE CHARGES AND FEES 3,187 2,881 10,083 8,839
TRUST AND OTHER FINANCIAL SERVICES INCOME 931 578 2,591 1,640
INSURANCE COMMISSION INCOME 208 285 963 1,091
GAIN ON SALE OF MARKETABLE SECURITIES, NET 176 (2) 720 28
GAIN ON SALE OF LOANS, NET 340 79 1,558 544
GAIN ON SALE OF REAL ESTATE OWNED, NET 132 (3) 314 451
INCREASE IN CASH SURRENDER VALUE OF BANK
OWNED LIFE INSURANCE 787 - 2,411 -
WRITEDOWN OF INVESTMENT SECURITIES - (400) - (400)
OTHER OPERATING INCOME 642 323 1,443 968
-------- -------- -------- --------
TOTAL NONINTEREST INCOME 6,403 3,741 20,083 13,161
NONINTEREST EXPENSE:
COMPENSATION AND EMPLOYEE BENEFITS 13,811 12,346 40,431 35,692
PREMISES AND OCCUPANCY COSTS 3,474 3,095 9,972 8,773
OFFICE OPERATIONS 2,028 1,786 6,168 5,227
PROCESSING EXPENSES 1,898 1,913 6,048 5,298
ADVERTISING 1,113 576 2,399 1,531
OTHER EXPENSES 3,094 1,879 7,616 5,826
-------- -------- -------- --------
TOTAL NONINTEREST EXPENSE 25,418 21,595 72,634 62,347
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 14,148 14,774 45,491 39,432
FEDERAL AND STATE INCOME TAXES 3,952 4,696 13,564 12,344
-------- -------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 10,196 10,078 31,927 27,088
CUMULATIVE EFFECT OF ACCOUNTING CHANGE - - - 2,237
-------- -------- -------- --------
NET INCOME $ 10,196 10,078 31,927 29,325
======== ======== ======== ========
BASIC PER SHARE AMOUNTS:
INCOME BEFORE CUMULATIVE EFFECT OF $ 0.21 $ 0.21 $ 0.67 $ 0.57
ACCOUNTING CHANGE
CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 0.00 $ 0.00 $ 0.00 $ 0.05
-------- -------- -------- --------
NET INCOME $ 0.21 $ 0.21 $ 0.67 $ 0.62
======== ======== ======== ========
DILUTED PER SHARE AMOUNTS:
INCOME BEFORE CUMULATIVE EFFECT OF $ 0.21 $ 0.21 $ 0.66 $ 0.56
ACCOUNTING CHANGE
CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 0.00 $ 0.00 $ 0.00 $ 0.05
-------- -------- -------- --------
NET INCOME $ 0.21 $ 0.21 $ 0.66 $ 0.61
======== ======== ======== ========
* - Adjusted for adoption of SFAS No. 147
See accompanying notes to unaudited consolidated financial statements
2
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
Unearned
THREE-MONTHS ENDED MARCH 31, 2002 Accum. Recognition
Common Stock Other and Total
---------------------- Paid-in Retained Comprehensive Retention Shareholders'
Shares Amount Capital Earnings * Income Plan Shares Equity *
---------- ---------- -------- ---------- ------------- ----------- ------------
Beginning balance at December 31, 2001 47,488,832 $ 4,749 71,460 214,363 4,077 (57) 294,592
Comprehensive income:
Net income - - - 10,078 - - 10,078
Change in unrealized gain on securities,
net of tax and reclassification adjustment - - - - (796) - (796)
---------- ---------- -------- ---------- ---------- ---------- ----------
Total comprehensive income - - - 10,078 (796) - 9,282
Exercise of stock options 18,752 2 86 - - - 88
RRP shares released - - - - - 57 57
Dividends declared ($.06 per share) - - - (726) - - (726)
---------- ---------- -------- ---------- ---------- ---------- ----------
Ending balance at March 31, 2002 47,507,584 $ 4,751 71,546 223,715 3,281 - 303,293
========== ========== ======== ========== ========== ========== ==========
Unearned
THREE-MONTHS ENDED MARCH 31, 2003 Accum. Recognition
Common Stock Other and Total
---------------------- Paid-in Retained Comprehensive Retention Shareholders'
Shares Amount Capital Earnings * Income Plan Shares Equity *
---------- ---------- -------- ---------- ---------- ---------- ----------
Beginning balance at December 31, 2002 47,639,626 $ 4,764 72,321 253,606 6,457 - 337,148
Comprehensive income:
Net income - - - 10,196 - - 10,196
Change in unrealized gain on securities,
net of tax and reclassification adjustment - - - - 220 - 220
---------- ---------- -------- ---------- ---------- ---------- ----------
Total comprehensive income - - - 10,196 220 - 10,416
Exercise of stock options 20,307 2 102 - - - 104
Dividends declared ($.08 per share) - - - (983) - - (983)
---------- ---------- -------- ---------- ---------- ---------- ----------
Ending balance at March 31, 2003 47,659,933 $ 4,766 72,423 262,819 6,677 - 346,685
========== ========== ======== ========== ========== ========== ==========
* - Adjusted for adoption of SFAS No. 147
See accompanying notes to unaudited consolidated financial statements
3
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
Unearned
NINE-MONTHS ENDED MARCH 31, 2002 Accum. Recognition
Common Stock Other and Total
---------------------- Paid-in Retained Comprehensive Retention Shareholders'
Shares Amount Capital Earnings * Income Plan Shares Equity *
---------- ---------- -------- ---------- ---------- ---------- ----------
Beginning balance at June 30, 2001 47,426,755 $ 4,743 71,283 196,566 3,178 (57) 275,713
Comprehensive income:
Net income - - - 29,325 - - 29,325
Change in unrealized gain on securities,
net of tax and reclassification adjustment - - - - 103 - 103
---------- ---------- -------- ---------- ---------- ---------- ----------
Total comprehensive income - - - 29,325 103 - 29,428
Exercise of stock options 80,829 8 263 - - - 271
RRP shares released - - - - - 57 57
Dividends declared ($.18 per share) - - - (2,176) - - (2,176)
---------- ---------- -------- ---------- ---------- ---------- ----------
Ending balance at March 31, 2002 47,507,584 $ 4,751 71,546 223,715 3,281 - 303,293
========== ========== ======== ========== ========== ========== ==========
Unearned
NINE-MONTHS ENDED MARCH 31, 2003 Accum. Recognition
Common Stock Other and Total
---------------------- Paid-in Retained Comprehensive Retention Shareholders'
Shares Amount Capital Earnings * Income Plan Shares Equity *
---------- ---------- -------- ---------- ---------- ---------- ----------
Beginning balance at June 30, 2002 47,549,659 $ 4,755 71,838 233,831 6,216 - 316,640
Comprehensive income:
Net income - - - 31,927 - - 31,927
Change in unrealized gain on securities,
net of tax and reclassification adjustment - - - - 461 - 461
---------- ---------- -------- ---------- ---------- ---------- ----------
Total comprehensive income - - - 31,927 461 - 32,388
Exercise of stock options 110,274 11 585 - - - 596
Dividends declared ($.24 per share) - - - (2,939) - - (2,939)
---------- ---------- -------- ---------- ---------- ---------- ----------
Ending balance at March 31, 2003 47,659,933 $ 4,766 72,423 262,819 6,677 - 346,685
========== ========== ======== ========== ========== ========== ==========
* - Adjusted for adoption of SFAS No. 147
See accompanying notes to unaudited consolidated financial statements
4
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
3/31/2003 3/31/02 * 3/31/2003 3/31/02 *
--------- --------- --------- ---------
OPERATING ACTIVITIES:
Net Income $ 10,196 10,078 31,927 29,325
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 2,294 1,664 6,120 4,555
Net loss (gain) on sale of assets (648) (74) (2,592) (1,023)
Net depreciation, amortization and accretion 2,611 1,253 7,444 4,468
Decrease (increase) in other assets 1,614 (200) (7,133) (2,742)
Increase (decrease) in other liabilities (847) 3,952 (1,919) 2,639
Net amortization (accretion) of premium/discount on
marketable securities 111 (915) (424) (3,081)
Noncash compensation expense related to stock benefit plans - 57 - 57
Noncash writedown of investment securities - 400 - 400
Noncash cumulative change in accounting principle - - - (2,237)
--------- --------- --------- ---------
Net cash provided by operating activities 15,331 16,215 33,423 32,361
INVESTING ACTIVITIES:
Purchase of marketable securities held-to-maturity (211,133) (39,372) (476,280) (117,775)
Purchase of marketable securities available-for-sale (276,984) (45,084) (438,984) (142,800)
Proceeds from maturities and principal reductions
of marketable securities held-to-maturity 102,231 19,991 229,398 55,476
Proceeds from maturities and principal reductions
of marketable securities available-for-sale 53,004 50,530 148,675 98,307
Proceeds from sales of marketable securities,
available-for-sale 25,019 4,569 82,999 18,914
Loan originations (306,736) (252,697) (921,465) (744,107)
Proceeds from loan maturities and principal reductions 255,785 207,652 683,265 538,120
Proceeds from loan sales 50,517 22,985 166,415 110,609
Purchase of FHLB stock (1,736) - (7,942) -
Proceeds from sale of real estate owned (3,393) 169 (8,321) 1,665
Net (purchase) sale of real estate owned for investment 1,456 74 4,035 (7)
Purchase of premises and equipment 159 (3,697) 77 (11,084)
Acquisitions, net of cash received - (949) 2,619 53,443
--------- --------- --------- ---------
Net cash used by investing activities $(311,811) (35,829) (535,509) (139,239)
* - Adjusted for adoption of SFAS No. 147
5
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
3/31/2003 3/31/02 * 3/31/2003 3/31/02 *
--------- --------- --------- ---------
FINANCING ACTIVITIES:
Increase (decrease) in deposits, net $ 177,409 62,333 454,039 157,348
Proceeds from long-term borrowings - - 180,000 541
Repayments of long-term borrowings (4,214) (38) (15,684) (17,275)
Net increase (decrease) in short-term borrowings (1,195) 2,249 4,010 (3,126)
Increase (decrease) in advances by borrowers for
taxes and insurance (69) (229) (3,738) (4,377)
Proceeds from issuance of guaranteed preferred
beneficial interests in the Company's junior
subordinated deferrable interest debentures - - - 99,000
Cash dividends paid (983) (726) (2,939) (2,176)
Proceeds from stock options exercised 104 88 596 271
--------- --------- --------- ---------
Net cash provided by financing activities 171,052 63,677 616,284 230,206
Net increase (decrease) in cash and cash equivalents $(125,428) 44,063 114,198 123,328
========= ========= ========= =========
Cash and cash equivalents at beginning of period $ 457,380 175,231 217,754 95,966
Net increase (decrease) in cash and cash equivalents (125,428) 44,063 114,198 123,328
--------- --------- --------- ---------
Cash and cash equivalents at end of period $ 331,952 219,294 331,952 219,294
========= ========= ========= =========
Cash paid during the period for:
Interest on deposits and borrowings (including interest
credited to deposit accounts of $22,407, $23,676,
$69,924 and $81,209, respectively) $ 34,086 32,803 105,627 112,561
========= ========= ========= =========
Income taxes $ 1,950 2,854 10,829 10,089
========= ========= ========= =========
Business acquisitions:
Fair value of assets acquired $ - 1,787 176,885 32,566
Cash received (paid) - (949) 2,619 53,443
--------- --------- --------- ---------
Liabilities assumed $ - 838 179,504 86,009
========= ========= ========= =========
Non-cash activities:
Loans transferred to real estate owned $ 702 2,143 2,149 3,124
========= ========= ========= =========
Sale of real estate owned financed by the Company $ 280 113 584 624
========= ========= ========= =========
* - Adjusted for adoption of SFAS No. 147
See accompanying notes to unaudited consolidated financial statements
6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The Northwest group of companies is organized in a two-tier holding company
structure. Northwest Bancorp, MHC is a federal mutual holding company which owns
approximately 74% of the outstanding shares of common stock of Northwest
Bancorp, Inc. (the "Company"). For the second consecutive fiscal year the mutual
holding company has applied for, and received approval from the Office of Thrift
Supervision ("OTS"), its primary regulator, to waive its right to receive cash
dividends from the Company.
The accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with instructions for Form 10-Q and, accordingly, do
not include the necessary footnote information for a complete presentation of
financial position, results of operations and cash flows in conformity with
accounting principles generally accepted in the United States of America. In the
opinion of management, all adjustments have been included which are necessary
for a fair presentation of financial position and results of operations. The
consolidated statements have been prepared using the accountings policies
described in the financial statements included in the Company's Annual Report of
Form 10-K/A for the fiscal year ended June 30, 2002. Certain items previously
reported have been reclassified to conform with the current period's reporting
format. The results of operations for the three and nine months ended March 31,
2003 are not necessarily indicative of the results that may be expected for the
entire fiscal year.
(2) PRINCIPLES OF CONSOLIDATION
The accompanying unaudited consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries, Northwest Savings
Bank ("Northwest"), Jamestown Savings Bank ("Jamestown"), Northwest Capital
Trust I, Northwest Bancorp Statutory Trust I, Northwest Consumer Discount
Company, Northwest Finance Company, Northwest Financial Services, Inc.,
Northwest Capital Group, Inc., Boetger and Associates, Inc., Rid-Fed, Inc.,
Allegheny Services, Inc., and Great Northwest Corporation. All significant
intercompany items have been eliminated.
(3) BUSINESS SEGMENTS
The Company has identified two reportable business segments based upon the
operating approach currently used by management. The Community Banks segment
includes the two savings bank subsidiaries of the Company, Northwest and
Jamestown, as well as the subsidiaries of the savings banks that provide similar
products and services. The savings banks are community-oriented institutions
that offer a full array of traditional deposit and loan products, including
mortgage, consumer and commercial loans, as well as trust, investment management
and brokerage services typically offered by a full-service financial
institution. The Consumer Finance segment is comprised of Northwest Consumer
Discount Company, a subsidiary of Northwest, that operates 46 offices in
Pennsylvania and two offices in southwestern New York. The subsidiary
compliments the services of the banks by offering personal installment loans for
a variety of consumer and real estate products. This activity is funded
primarily through its intercompany borrowing relationship with Northwest. Net
income is primarily used by management to measure segment performance. The
following tables provide financial information for these segments. The "All
Other" column
7
represents the parent company, other nonbank subsidiaries and elimination
entries necessary to reconcile to the consolidated amounts presented in the
financial statements.
AS OF OR FOR THE THREE MONTHS ENDED:
- -----------------------------------------------------------------------------------------------------------------------
Community Consumer
MARCH 31, 2003 ($ IN 000'S) Banks Finance All Other * Consolidated
- -----------------------------------------------------------------------------------------------------------------------
External interest income $ 64,603 4,513 151 69,267
- -----------------------------------------------------------------------------------------------------------------------
Intersegment interest income 1,243 - (1,243) -
- -----------------------------------------------------------------------------------------------------------------------
Interest expense 32,101 1,343 366 33,810
- -----------------------------------------------------------------------------------------------------------------------
Provision for loan losses 1,794 500 - 2,294
- -----------------------------------------------------------------------------------------------------------------------
Noninterest income 6,107 296 - 6,403
- -----------------------------------------------------------------------------------------------------------------------
Noninterest expense 23,278 1,930 210 25,418
- -----------------------------------------------------------------------------------------------------------------------
Income tax expense (benefit) 4,123 429 (600) 3,952
- -----------------------------------------------------------------------------------------------------------------------
Net income 10,657 607 (1,068) 10,196
- -----------------------------------------------------------------------------------------------------------------------
Total assets $4,987,757 123,236 20,310 5,131,303
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Community Consumer
MARCH 31, 2002 ($ IN 000'S) Banks Finance All Other * Consolidated
- -----------------------------------------------------------------------------------------------------------------------
External interest income $ 63,872 4,856 55 68,783
- -----------------------------------------------------------------------------------------------------------------------
Intersegment interest income 1,157 - (1,157) -
- -----------------------------------------------------------------------------------------------------------------------
Interest expense 32,836 1,600 55 34,491
- -----------------------------------------------------------------------------------------------------------------------
Provision for loan losses 865 799 - 1,664
- -----------------------------------------------------------------------------------------------------------------------
Noninterest income 3,495 246 - 3,741
- -----------------------------------------------------------------------------------------------------------------------
Noninterest expense 19,672 1,832 91 21,595
- -----------------------------------------------------------------------------------------------------------------------
Income tax expense (benefit) 4,893 350 (547) 4,696
- -----------------------------------------------------------------------------------------------------------------------
Net income 10,258 521 (701) 10,078
- -----------------------------------------------------------------------------------------------------------------------
Total assets $4,058,772 131,516 10,149 4,200,437
- -----------------------------------------------------------------------------------------------------------------------
* Eliminations consist of intercompany interest income and interest expense
8
AS OF OR FOR THE NINE MONTHS ENDED:
- -----------------------------------------------------------------------------------------------------------------------
Community Consumer
MARCH 31, 2003 ($ IN 000'S) Banks Finance All Other * Consolidated
- -----------------------------------------------------------------------------------------------------------------------
External interest income $ 194,634 13,558 256 208,448
- -----------------------------------------------------------------------------------------------------------------------
Intersegment interest income 4,089 - (4,089) -
- -----------------------------------------------------------------------------------------------------------------------
Interest expense 99,377 4,404 505 104,286
- -----------------------------------------------------------------------------------------------------------------------
Provision for loan losses 4,189 1,931 - 6,120
- -----------------------------------------------------------------------------------------------------------------------
Noninterest income 19,284 799 - 20,083
- -----------------------------------------------------------------------------------------------------------------------
Noninterest expense 66,607 5,620 407 72,634
- -----------------------------------------------------------------------------------------------------------------------
Income tax expense (benefit) 14,281 996 (1,713) 13,564
- -----------------------------------------------------------------------------------------------------------------------
Net income 33,553 1,406 (3,032) 31,927
- -----------------------------------------------------------------------------------------------------------------------
Total assets $4,987,757 123,236 20,310 5,131,303
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Community Consumer
MARCH 31, 2003 ($ IN 000'S) Banks Finance All Other * Consolidated
- -----------------------------------------------------------------------------------------------------------------------
External interest income $ 192,367 14,571 159 207,097
- -----------------------------------------------------------------------------------------------------------------------
Intersegment interest income 4,927 - (4,927) -
- -----------------------------------------------------------------------------------------------------------------------
Interest expense 111,532 5,603 (3,211) 113,924
- -----------------------------------------------------------------------------------------------------------------------
Provision for loan losses 2,295 2,260 - 4,555
- -----------------------------------------------------------------------------------------------------------------------
Noninterest income 12,216 945 - 13,161
- -----------------------------------------------------------------------------------------------------------------------
Noninterest expense 56,754 5,280 313 62,347
- -----------------------------------------------------------------------------------------------------------------------
Income tax expense (benefit) 12,169 976 (801) 12,344
- -----------------------------------------------------------------------------------------------------------------------
Cumulative effect of accounting
change 2,237 - - 2,237
- -----------------------------------------------------------------------------------------------------------------------
Net income 28,997 1,397 (1,069) 29,325
- -----------------------------------------------------------------------------------------------------------------------
Total assets $4,058,772 131,516 10,149 4,200,437
- -----------------------------------------------------------------------------------------------------------------------
* Eliminations consist of intercompany interest income and interest expense
(4) BUSINESS COMBINATION
On September 13, 2002, the Company completed the previously announced
acquisition of Prestige Bancorp, Inc., and its subsidiary Prestige Bank, both
headquartered in Pleasant Hills, Pennsylvania. The acquisition included the four
offices of Prestige Bank, assets of approximately $180 million including
approximately $18.6 million of cash, deposits of approximately $122 million and
shareholders' equity of approximately $10 million. Under terms of the agreement,
shareholders received $13.75 in cash for each share of Prestige Bancorp, Inc.
common stock, or approximately $14.6 million, resulting in goodwill of
approximately $5.0 million and other intangible assets of approximately
$700,000.
9
(5) GOODWILL AND OTHER INTANGIBLE ASSETS
On October 1, 2002, the Financial Accounting Standards Board (FASB) issued, and
the Company adopted, Statement of Financial Accounting Standards No. 147,
"Acquisitions of Certain Financial Institutions - an amendment of FASB
Statements No. 72 and 144 and FASB Interpretation No. 9" ("SFAS 147"). This
statement addresses the financial accounting and reporting for the acquisition
of all or part of a financial institution, except for transactions between two
or more mutual enterprises. This statement removes the acquisitions of financial
institutions from the scope of FASB Statement No. 72, "Accounting for Certain
Acquisitions of Banking or Thrift Institutions" and FASB Interpretation No. 9,
"Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a
Similar Institution is Acquired in a Business Combination Accounted for by the
Purchase Method." The acquisition of all or part of a financial institution that
meets the definition of a business combination shall now be accounted for by the
purchase method in accordance with FASB Statement No. 141, "Business
Combinations."
As a result of adopting SFAS 147, the Company reclassified approximately $60
million of previously unidentifiable intangible assets to goodwill and ceased
the regularly scheduled amortization expense of these intangible assets.
The transition provisions of this pronouncement require the Company to adjust
all interim and annual financial statements issued after July 1, 2001, the date
of initial adoption of SFAS No. 142, "Goodwill and Other Intangible Assets." As
such, all financial statements presented herein have been adjusted as required.
The following table illustrates the effect of the adoption of SFAS 147 on net
income for each period presented in the preceding interim financial statements:
- ---------------------------------------------------------------------------------------------------
Three months Three months Nine months Nine months
ended ended ended ended
3/31/03 3/31/02 3/31/03 3/31/02
- ---------------------------------------------------------------------------------------------------
Previously reported net income $ 10,196 8,969 31,927 26,145
Add back goodwill amortization
(net of tax) -- 1,109 -- 3,180
---------- ---------- ---------- ----------
Adjusted net income $ 10,196 10,078 31,927 29,325
========== ========== ========== ==========
Earnings per share (diluted):
Previously reported earnings
per share $ 0.21 $ 0.19 $ 0.66 $ 0.55
Add back goodwill amortization
(net of tax) 0.00 0.02 0.00 0.06
---------- ---------- ---------- ----------
Adjusted earnings per share $ 0.21 $ 0.21 $ 0.66 $ 0.61
========== ========== ========== ==========
- ---------------------------------------------------------------------------------------------------
10
(6) BORROWED FUNDS
Borrowed funds as of March 31, 2003 and June 30, 2002, are presented in the
following table:
- ------------------------------------------------------------------------------------------
March 31, 2003 June 30, 2002
-----------------------------------------
Term notes payable to the FHLB of Pittsburgh:
Due within one year $ 41,439 34,200
Due between one and two years 7,998 150
Due between two and three years 27,145 25,000
Due between three and four years -- --
Due between four and five years 43,734 --
Due between five and ten years 333,967 175,000
Due between ten and twenty years 1,110 1,150
-------- --------
455,393 235,500
Revolving line of credit, Federal Home
Loan Bank of Pittsburgh -- --
Other borrowings due between
one and two years 180 180
Investor notes payable, due
various dates through 2006 6,409 6,414
Securities sold under agreement to
repurchase, due various dates 21,180 17,166
-------- --------
Total borrowed funds $483,162 259,260
======== ========
- ------------------------------------------------------------------------------------------
(7) GUARANTEES
The Company issues standby letters of credit in the normal course of business.
Standby letters of credit are conditional commitments issued to guarantee the
performance of a customer to a third party. Standby letters of credit generally
are contingent upon the failure of the customer to perform according to the
terms of the underlying contract with the third party. The Company is required
to perform under a standby letter of credit when drawn upon by the guaranteed
third party in the case of nonperformance by the Company's customer. The credit
risk associated with standby letters of credit is essentially the same as that
involved in extending loans to customers and is subject to normal credit
policies. Collateral may be obtained based on management's credit assessment of
the customer. The maximum potential amount of future payments the Company could
be required to make under these standby letters of credit is $7.7 million, of
which $6.6 million is fully collateralized. Currently no liability has been
recognized by the Company for these obligations. There are no recourse
provisions that would enable the Company to recover any amounts from third
parties.
11
(8) STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for stock options and discloses the fair value of
options granted as permitted by SFAS No. 123, Accounting for Stock-based
Compensation. No stock-based employee compensation cost is reflected in net
income, as all options granted had an exercise price equal to the market value
of the common stock at the date of grant. Stock-based employee compensation
cost, net of any related tax effects, that would have been included in the
determination of net income if the fair value based method had been applied is
$70,000 and $39,000 for the three month periods ended March 31, 2003 and 2002,
respectively, and $193,000 and $87,000 for the nine month periods ended March
31, 2003 and 2002, respectively.
The following table summarizes the pro forma effect assuming compensation cost
for such awards had been recorded based upon the estimated fair value (in
thousands, except per share data):
- --------------------------------------------------------------------------------------------------------
Three months ended March 31, Nine months ended March 31,
------------------------------------------------------------------------
2003 2002 2003 2002
------------------------------------------------------------------------
Net income:
As reported 10,196 10,078 31,927 29,325
Pro forma 10,126 10,039 31,734 29,238
Basic earnings per share:
As reported $0.21 $0.21 $0.67 $0.62
Pro forma $0.21 $0.21 $0.67 $0.62
Diluted earnings per share:
As reported $0.21 $0.21 $0.66 $0.61
Pro forma $0.21 $0.21 $0.66 $0.61
- --------------------------------------------------------------------------------------------------------
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information, this document may contain certain
forward-looking statements, as defined in the Securities Exchange Act of 1934,
as amended, and the regulations thereunder. These forward-looking statements
contained herein are subject to certain risks and uncertainties that could cause
actual results to differ materially from those expressed or implied in the
forward-looking statements. Important factors that might cause such a difference
include, but are not limited to, economic, regulatory and other factors as
discussed herein. Readers are cautioned not to place undue reliance on these
forward-looking statements, as they reflect management's analysis only as of the
date of this report. The Company has no obligation to revise or update these
forward-looking statements to reflect events or circumstances that arise after
the date of this report.
DISCUSSION OF FINANCIAL CONDITION CHANGES FROM JUNE 30, 2002 TO MARCH 31, 2003
ASSETS
At March 31, 2003 the Company had total assets of $5.131 billion, an increase of
$825.8 million, or 19.2%, from $4.306 billion at June 30, 2002. This increase
was funded primarily by an increase in deposits of $575.8 million, an increase
in borrowed funds of $223.9 million, and net income of $31.9 million.
Cash and cash equivalents, interest-earning deposits and marketable securities
totaled $1.648 billion at March 31, 2003, an increase of $598.3 million, or
57.0%, from $1.050 billion at June 30, 2002. This increase resulted from the
investment of funds received from the growth in deposits and borrowed funds as
well as approximately $30 million of marketable securities received as part of
the acquisition of Prestige Bancorp, Inc. and its subsidiary Prestige Bank,
which occurred during the Company's first fiscal quarter. Net loans receivable
increased by $191.7 million, or 6.4%, to $3.204 billion at March 31, 2003 from
$3.013 billion at June 30, 2002. This increase resulted primarily from the
purchase of approximately $132 million of loans as part of the Prestige Bank
acquisition mentioned above, as the Company experienced internal loan growth
that was slow compared to historical standards.
LIABILITIES
Deposits increased by $575.8 million, or 16.0%, to $4.169 billion at March 31,
2003 from $3.593 billion at June 30, 2002. This increase resulted primarily from
strong internal deposit growth, along with the purchase of four retail offices
with deposits of approximately $122 million as part of the Prestige Bank
acquisition. Borrowed funds increased by $223.9 million, or 86.4%, to $483.2
million at March 31, 2003 from $259.3 million at June 30, 2002. This increase is
primarily the result of the Company borrowing long-term fixed-rate funds from
the Federal Home Loan Bank of Pittsburgh ("FHLB") which were used to purchase
floating rate investment securities as part of its interest-rate risk strategy.
In addition, approximately $55.9 million of FHLB borrowings were assumed as part
of the Prestige acquisition.
13
CAPITAL RESOURCES AND LIQUIDITY
Total shareholders' equity at March 31, 2003 was $346.7 million, an increase of
$30.1 million, or 9.5%, from $316.6 million at June 30, 2002. This increase was
primarily attributable to net income for the nine month period of $31.9 million
partially offset by the payment of cash dividends of $2.9 million.
The Company's banking subsidiaries, Northwest and Jamestown, are subject to
various regulatory capital requirements administered by the state and federal
banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory - and possibly additional discretionary - actions by the
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the banking subsidiaries must
meet specific capital guidelines that involve quantitative measures of their
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classification are also
subject to qualitative judgements by the regulators about components,
risk-weighting and other factors.
Quantitative measures, established by regulation to ensure capital adequacy
require the banking subsidiaries to maintain minimum amounts and ratios (set
forth in the table below) of Total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital to
average assets (as defined).
March 31, 2003
Minimum Capital Well Capitalized
Actual Requirements Requirements
- -----------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------
Total Capital (to risk weighted assets):
- -----------------------------------------------------------------------------------------------------------------------
Northwest Savings Bank $ 304,037 12.34% $ 197,118 8.00% $ 246,398 10.00%
- -----------------------------------------------------------------------------------------------------------------------
Jamestown Savings Bank $ 18,543 10.57% $ 14,037 8.00% $ 17,546 10.00%
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Tier I Capital (to risk weighted assets):
- -----------------------------------------------------------------------------------------------------------------------
Northwest Savings Bank $ 278,556 11.31% $ 98,559 4.00% $ 147,839 6.00%
- -----------------------------------------------------------------------------------------------------------------------
Jamestown Savings Bank $ 17,170 9.79% $ 7,018 4.00% $ 10,527 6.00%
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Tier I Capital (leverage) (to average assets):
- -----------------------------------------------------------------------------------------------------------------------
Northwest Savings Bank $ 278,556 6.00% $ 139,318 3.00%* $ 232,196 5.00%
- -----------------------------------------------------------------------------------------------------------------------
Jamestown Savings Bank $ 17,170 5.46% $ 9,438 3.00%* $ 15,729 5.00%
- -----------------------------------------------------------------------------------------------------------------------
14
June 30, 2002
Minimum Capital Well Capitalized
Actual Requirements Requirements
- -----------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------
Total Capital (to risk weighted assets):
- -----------------------------------------------------------------------------------------------------------------------
Northwest Savings Bank $276,565 12.49% $177,174 8.00% $221,467 10.00%
- -----------------------------------------------------------------------------------------------------------------------
Jamestown Savings Bank $ 14,727 11.04% $ 10,673 8.00% $ 13,341 10.00%
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Tier I Capital (to risk weighted assets):
- -----------------------------------------------------------------------------------------------------------------------
Northwest Savings Bank $253,937 11.47% $ 88,587 4.00% $132,880 6.00%
- -----------------------------------------------------------------------------------------------------------------------
Jamestown Savings Bank $ 13,765 10.32% $ 5,336 4.00% $ 8,004 6.00%
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Tier I Capital (leverage) (to average assets):
- -----------------------------------------------------------------------------------------------------------------------
Northwest Savings Bank $253,937 6.47% $117,767 3.00%* $196,279 5.00%
- -----------------------------------------------------------------------------------------------------------------------
Jamestown Savings Bank $ 13,765 5.87% $ 7,035 3.00%* $ 11,725 5.00%
- -----------------------------------------------------------------------------------------------------------------------
* The FDIC has indicated that the most highly rated institutions which meet
certain criteria will be required to maintain a ratio of 3%, and all other
institutions will be required to maintain an additional capital cushion of 100
to 200 basis points. As of March 31, 2003, the Company had not been advised of
any additional requirements in this regard.
The Company's banking subsidiaries, Northwest and Jamestown, are required to
maintain a sufficient level of liquid assets, as determined by management and
defined and reviewed for adequacy by the FDIC and the applicable state
department of banking during their regular examinations. The Banks' internal
liquidity requirements are based upon liquid assets as a percentage of deposits
and borrowings ("liquidity ratio"). The Banks have always maintained a level of
liquid assets in excess of regulatory and internal requirements, and the
liquidity ratio at March 31, 2003 was 27.8% and 52.0% for Northwest and
Jamestown, respectively. The Company and its subsidiaries adjust liquidity
levels in order to meet funding needs for deposit outflows, payment of real
estate taxes and insurance on mortgage loan escrow accounts, repayment of
borrowings, when applicable, and loan commitments.
The Company paid $2.9 million in cash dividends in the first nine months of the
current fiscal year, compared with $2.2 million in the prior year period. The
common stock dividend payout ratio (dividends declared per share divided by net
income per share) was 38.1% in the third quarter on a dividend of $.08 compared
with 28.6% in the same period last year on a dividend of $.06 per share.
15
NONPERFORMING ASSETS
The following table sets forth information with respect to the Company's
nonperforming assets. Nonaccrual loans are those loans on which the accrual of
interest has ceased. Loans are automatically placed on nonaccrual status when
they are more than 90 days contractually delinquent and may also be placed on
nonaccrual status even if not more than 90 days delinquent but other conditions
exist. Other nonperforming assets represent property acquired by the Company
through foreclosure or repossession. Foreclosed property is carried at the lower
of its fair value less estimated costs to sell or the principal balance of the
related loan. Nonperforming assets increased by $5.6 million, or 26.9%, to $26.6
million at March 31, 2003 from $21.0 million at June 30, 2002. This increase is
attributable to nonperforming loans acquired as part of our acquisition of
Prestige Bancorp, Inc. and an increase in consumer loans greater than 90 days
delinquent. Management believes that the generally low level of nonperforming
assets is attributable to stringent credit policies and sustained collection
procedures.
(Dollars in Thousands)
- --------------------------------------------------------------------------------------------------------------------
Loans accounted for on a nonaccrual basis: March 31, 2003 June 30, 2002
- --------------------------------------------------------------------------------------------------------------------
One-to-four family residential loans $ 8,525 $ 7,278
- --------------------------------------------------------------------------------------------------------------------
Multifamily and commercial real estate loans 2,658 2,407
- --------------------------------------------------------------------------------------------------------------------
Consumer loans 5,827 3,991
- --------------------------------------------------------------------------------------------------------------------
Commercial business loans 5,727 2,124
- --------------------------------------------------------------------------------------------------------------------
Total $ 22,737 $ 15,800
- --------------------------------------------------------------------------------------------------------------------
Total nonperforming loans as a percentage of
net loans receivable .71% .52%
- --------------------------------------------------------------------------------------------------------------------
Total real estate acquired through foreclosure
and other real estate owned $ 3,851 $ 5,157
- --------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 26,588 $ 20,957
- --------------------------------------------------------------------------------------------------------------------
Total nonperforming assets as a percentage of
total assets .52% .49%
- --------------------------------------------------------------------------------------------------------------------
A loan is considered to be impaired, as defined by SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS 114"), when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan agreement
including both contractual principal and interest payments. The amount of
impairment is required to be measured using one of three methods prescribed by
SFAS 114: (1) the present value of expected future cash flows discounted at the
loan's effective interest rate; (2) the loan's observable market price; or (3)
the fair value of collateral if the loan is collateral dependent. If the measure
of the impaired loan is less that the recorded investment in the loan, a
specific reserve is allocated for the impairment. Impaired loans at March 31,
2003 and June 30, 2002 were $8.4 million and $4.5 million, respectively.
16
ALLOWANCE FOR LOAN LOSSES
The Company's Board of Directors has adopted an "Allowance for Loan Losses"
(ALL) policy designed to provide management with a systematic methodology for
determining and documenting the ALL each reporting period. This methodology was
developed to provide a consistent process and review procedure to ensure that
the ALL is in conformity with the Company's policies and procedures and other
supervisory and regulatory guidelines.
On a monthly basis, the Credit Review and Administration ("CRA") department, as
well as loan officers, branch managers and department heads, review and monitor
the loan portfolio for problem loans. This review includes the monthly
delinquency reports as well as historical comparisons and trend analysis. On a
quarterly basis the CRA department grades or classifies problem loans or
potential problem loans based upon their knowledge of the lending relationship
and other information previously accumulated. The Company's loan grading system
for problem loans is consistent with industry regulatory guidelines which
classify loans as "special mention", "substandard", "doubtful" or "loss." Loans
that do not expose the Company to risk sufficient to warrant classification in
one of the subsequent categories, but which possess some weaknesses, are
designated as "special mention". A "substandard" loan is any loan that is more
than 90 days contractually delinquent or is inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral
pledged, if any. Loans classified as "doubtful" have all the weaknesses inherent
in those classified as "substandard" with the added characteristic that the
weaknesses present make a collection or liquidation in full, on the basis of
currently existing facts, conditions or values, highly questionable and
improbable. Loans classified as "loss" are considered uncollectible so that
their continuance as assets without the establishment of a specific loss reserve
in not warranted.
The loans that have been classified as substandard or doubtful are reviewed by
the CRA department for possible impairment under the provisions of Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan" ("SFAS 114"). A loan is considered impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan agreement
including both contractual principal and interest payments.
If an individual loan is deemed to be impaired, the CRA department determines
the proper measurement of impairment for each loan based on one of three methods
as prescribed by SFAS 114: (1) the present value of expected future cash flows
discounted at the loan's effective interest rate; (2) the loan's observable
market price; or (3) the fair value of the collateral if the loan is collateral
dependent. If the measure of the impaired loan is more or less than the recorded
investment in the loan, the CRA department adjusts the specific allowance
associated with that individual loan accordingly.
If a substandard or doubtful loan is not considered individually for impairment,
it is grouped with other loans that possess common characteristics for
impairment evaluation and analysis under the provisions of Statement of
Financial Accounting Standards No. 5, "Accounting for Contingencies." This
segmentation is accomplished by grouping loans of similar product types, risk
characteristics and industry concentration into homogeneous pools. A range of
losses for each pool is then established based upon historical loss ratios. This
historical net charge-off amount is then analyzed
17
and adjusted based on historical delinquency trends as well as the current
economic, political, regulatory and interest rate environment and used to
estimate the current measure of impairment.
The individual impairment measures along with the estimated range of losses for
each homogeneous pool are consolidated into one summary document. This summary
schedule along with the support documentation used to establish this schedule is
presented to the Credit Committee by the Vice President of CRA on a quarterly
basis. The Credit Committee reviews the processes and documentation presented,
reviews the concentration of credit by industry and customer, discusses lending
products, activity, competition and collateral values, as well as economic
conditions in general and in each market area of the Company. Based on this
review and discussion the appropriate amount of ALL is estimated and any
adjustments to reconcile the actual ALL with this estimate is determined. In
addition, the Credit Committee considers if any changes to the methodology are
needed. The Credit Committee also reviews and discusses the Company's
delinquency trends, nonperforming asset amounts and ALL levels and ratios with
its peer group as well as state and national statistics. Following the Credit
Committee's review and approval, a similar review is performed by the Board of
Director's Risk Management Committee.
In addition to the reviews by the Credit Committee and the Risk Management
Committee, regulators from either the FDIC or state department of banking
perform an extensive review on an annual basis for the adequacy of the ALL and
its conformity with regulatory guidelines and pronouncements. The internal audit
department also performs a regular review of the detailed supporting schedules
for accuracy and reports their findings to the Audit Committee of the Board of
Directors. Any recommendations or enhancements from these independent parties
are considered by management and the Credit Committee and implemented
accordingly.
Management acknowledges that this is a dynamic process and consists of factors,
many of which are external and out of management's control, that can change
often, rapidly and substantially. The adequacy of the ALL is based upon
estimates using all the information previously discussed as well as current and
known circumstances and events. There is no assurance that actual portfolio
losses will not be substantially different that those that were estimated.
18
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND
2002
Net income for the three months ended March 31, 2003 was $10.2 million, or $.21
per diluted share, an increase of $100,000 from $10.1 million, or $.21 per
diluted share, for the same quarter last year. The prior-year figures have been
adjusted, as required by SFAS 147, to reflect operating results excluding the
amortization of certain unidentifiable intangible assets that arose as a result
of branch acquisitions completed by the Company in previous years. The effect on
net income of the adoption of SFAS 147 was an increase of $1.1 million, or $.02
per diluted share, for each three-month period ended March 31, 2003 and 2002.
The increase in net income also resulted from a $1.2 million increase in net
interest income, a $2.7 million increase in noninterest income and a $744,000
decrease in income tax expense which were offset by a $630,000 increase in the
provision for loan losses and a $3.8 million increase in noninterest expense.
Net income for the three months ended March 31, 2003 represents an 11.94% and
..81% return on average equity and return on average assets, respectively,
compared to 13.48% and .97% for the same quarter last year.
INTEREST INCOME
Total interest income increased by $1.1 million, or 1.5%, on a taxable
equivalent basis, to $70.7 million due to an increase in average interest
earning assets of $801.2 million, or 20.4%, to $4.722 billion. The effect of the
increase in interest earning assets on interest income was offset by a decrease
in the yield on interest earning assets to 5.99% from 7.11%. The increase in
average interest earning assets resulted from strong internal deposit growth,
additional borrowings invested in variable rate investments and the acquisition
of Prestige. The decrease in the overall yield on interest earning assets
quarter-over-quarter resulted from the repricing of variable rate assets, as
well as the growth of interest earning assets during a period of declining
interest rates.
Interest income on loans receivable decreased by $160,000, or less than 1%, on a
taxable equivalent basis, to $57.0 million primarily because of a decrease in
the average rate to 7.11% from 7.72%. The effect of this decrease was partially
offset by an increase in the average balance outstanding of $245.8 million.
Average loans outstanding increased primarily as a result of the $132 million of
loans obtained as part of the Prestige acquisition, as well as average internal
loan growth. The decrease in average yield resulted primarily from the repricing
of variable rate loans and the refinancing of fixed rate loans in a declining
interest rate environment, along with the growth in the Company's loan portfolio
over the past year at interest rate levels lower than the then existing average
portfolio rate.
Interest income on mortgage-backed securities increased by $608,000, or 9.4%, to
$7.1 million primarily because of an increase in the average balance of $294.2
million, or 57.5%, to $806.3 million. The effect of the increase in average
balance was partially offset by a decrease in the average yield to 3.52% from
5.07%. The average balance increased primarily as a result of investing the
funds from the aforementioned deposit and borrowing growth. The average yield on
mortgage-backed securities, of which approximately 80% are variable rate,
primarily decreased as a result of the continued reduction in short-term market
interest rates.
Interest income on investment securities increased by $517,000, or 10.5%, to
$5.4 million, on a taxable-equivalent basis. The average balance increased $59.4
million, or 20.3% to $352.5 million, while the average yield decreased to 6.18%
from 6.73%. The increase in the average balance of
19
investment securities was primarily due to the investment of funds generated
from the aforementioned deposit and borrowing growth. The decrease in the
taxable equivalent yield was a result of purchasing investment securities in a
lower interest rate environment.
Interest income on interest-earning deposits increased by $73,000, or 8.9%,
because the average balance of interest-earning deposits increased by $190.1
million, or 145.5%, to $320.8 million which was partially offset by a decrease
in the average yield to 1.11% from 2.50%. The increase in average balance is
primarily because the Company has experienced difficulty in deploying the
significant inflow of funds from deposit growth, borrowings and loan payments
into loans and investments. The decrease in the average yield is a result of the
continued decline in short-term market rates over the last twelve months.
INTEREST EXPENSE
Total interest expense decreased by $681,000, or 2.0%, to $33.8 million
primarily due to a decrease in the average cost of interest-bearing liabilities
to 3.02% from 3.81%, which was partially offset by an increase in the average
balance of interest-bearing liabilities of $859.0 million, or 23.7%, to $4.480
billion. The decrease in the cost of funds resulted primarily from the Company's
depositors moving funds from certificates of deposit, to savings accounts and
insured money fund accounts, which typically have lower rates than certificates
of deposit. In addition, the Company was able to secure long-term fixed-rate
borrowings from the FHLB at favorable funding rates which lowered its overall
cost of borrowings. The increase in the average balance of interest-bearing
liabilities resulted primarily from an increase of $629.1 million, or 19.3%, in
the average balance of deposits, mainly attributed to the growth of existing
offices along with new office openings and to a lesser extent, acquisitions.
Average borrowed funds also increased by $229.9 million, or 90.2%, as the
Company secured these long-term fixed-rate borrowings from the FHLB which were
used to purchase variable rate assets.
NET INTEREST INCOME
Net interest income increased by $1.7 million, or 5.0%, on a taxable equivalent
basis, to $36.9 million compared to $35.2 million. This increase in net interest
income was attributable to the overall growth in the Company's balance sheet.
The Company's net interest rate spread compressed to 2.97%, from 3.30% as the
average yield on interest earning assets decreased more than the average cost on
interest bearing liabilities.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased by $630,000, or 37.9%, to $2.3 million
from $1.7 million. Management analyzes the allowance for loan losses as
described in the section entitled "Allowance for Loan Losses." The provision
that is recorded is sufficient, in management's judgement, to bring this reserve
to a level that reflects the risk inherent in the Company's loan portfolio
relative to loan mix, economic conditions and historical loss experience. As
part of this analysis, management considered the increase in net charge-offs for
the period of $895,000, or 87.6%, to $1.9 million compared to $1.0 million for
the same period last year. In addition, management considered the growth in the
commercial loan portfolio during the current quarter and the increase in
nonperforming loans of $6.6 million, or 41.2%, to $22.7 million at March 31,
2003 from $16.1 million at March 31, 2002.
20
NONINTEREST INCOME
Noninterest income increased by $2.7 million, or 71.2%, to $6.4 million for the
current quarter from $3.7 million for the same period in the prior year. The
Company experienced a favorable increase in the fee income associated with loans
and deposits of $306,000, or 10.6%, to $3.2 million for the quarter, related
primarily to the growth of those portfolios. Trust and other financial services
income increased by $353,000, or 61.1%, to $931,000 for the quarter primarily as
a result of the additional fee income contributed by Boetger and Associates, an
actuarial and retirement plan services company acquired on July 1, 2002. The
Company's gain on sale of loans increased by $261,000, or 330.4%, to $340,000 as
the Company sold almost all of the fixed-rate mortgage loans originated through
its wholesale lending business while retaining the rights to service those
loans. The Company is also realizing the benefit of purchasing $60 million of
insurance on the lives of its directors and a certain group of key employees.
The increase in the cash surrender value of these policies provided $787,000 of
noninterest income for the quarter. These tax free investment returns are used
to help offset the increase in employee benefit costs such as healthcare.
NONINTEREST EXPENSE
Noninterest expense increased by $3.8 million, or 17.7%, to $25.4 million from
$21.6 million for the same quarter in the prior year. All major expense
categories other than processing expense, increased as a result of a combination
of the significant growth of the Company's retail network over the past twelve
months, the expansion of its investment management, trust and brokerage
services, and the addition of new products and services. Processing expense
decreased from the prior year quarter due to efficiencies gained by the Company.
Management believes, however, that despite these increases in costs due to
expansion, progress has been made in controlling operating expense as the ratio
of operating expense to average assets has remained at approximately 2.0%.
INCOME TAXES
The provision for income taxes for the three months ended March 31, 2003
decreased by $744,000, or 15.8%, compared to the same period last year. This
decrease in income tax expense is primarily due to an increase in non-taxable
income a decrease in pre-tax earnings of $626,000, or 4.2%.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED MARCH 31, 2003 AND
2002
Net income for the nine months ended March 31, 2003 was $31.9 million, or $.66
per diluted share, an increase of $2.6 million, or 8.9%, from $29.3 million, or
$.61 per diluted share, for the same period last year. The effect on net income
of adopting SFAS 147 and not amortizing goodwill that originated from branch
acquisitions was $3.3 million and $3.2 million for the nine month periods ended
March 31, 2003 and 2002, respectively. Included in the nine month period ended
March 31, 2002 is the cumulative effect of an accounting change. The accounting
change in the prior year was required when the Company adopted Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
and recognized as income $2.2 million of negative goodwill that arose from a
previous acquisition. On a comparable basis, the increase in net income resulted
from an $11.0 million increase in net interest income and a $6.9 million
increase in noninterest income which were partially offset by an increase in
noninterest expense of $10.3 million and an increase in the provision for loan
losses of $1.6 million.
21
Net income for the nine months ended March 31, 2003 represents a 12.80% and .89%
return on average equity and return on average assets, respectively, compared to
13.52% and .98% for the same prior year period.
INTEREST INCOME
Total interest income increased by $3.1 million, or 1.5%, on a taxable
equivalent basis, to $212.6 million due to an increase in average interest
earning assets of $685.2 million, or 18.1%, to $4.478 billion. The effect of the
increase in interest earning assets was offset by a decrease in the yield on
interest earning assets to 6.33% from 7.36%. The increase in average interest
earning assets was funded by strong internal deposit growth, additional
borrowings from the FHLB and the acquisition of Prestige. The decrease in the
overall yield on interest earning assets year over year resulted from the
repricing of variable rate assets, as well as the growth of interest earning
assets during the period of declining interest rates.
Interest income on loans receivable increased by $2.1 million, or 1.2%, on a
taxable equivalent basis, to $173.3 million due to an increase in average loans
outstanding of $245.5 million, or 8.4%, to $3.155 billion. The effect of this
increase was largely offset by a decrease in the average yield on loans to 7.32%
from 7.84%. Average loans outstanding increased primarily because of continued
loan demand throughout the Company's market area as well as the aforementioned
acquisition. The decrease in average yield resulted from the repricing of
variable rate loans and the refinancing of fixed rate loans in a declining
interest rate environment along with the growth in the Company's loan portfolio
over the past year at interest rate levels lower than the existing average
portfolio rate.
Interest income on mortgage-backed securities decreased by $320,000, or 1.6%, to
$20.0 million. This decrease in interest income is attributed to the decrease in
average yield to 3.98% from 5.31%. The decrease in rate was partially offset by
an increase in average balance of $158.9 million, or 31.2%, to $668.2 million.
The average yield on mortgage-backed securities, of which approximately 80% are
variable rate, decreased as a result of the continued reduction in short-term
market rates. The average balance increased primarily as a result of investing
the funds from the aforementioned deposit and borrowing growth as well as the
securities received as part of the Prestige acquisition.
Interest income on investment securities increased by $1.0 million, or 7.1%, on
a taxable equivalent basis, to $15.7 million. The increase in average balance of
$71.3 million, or 27.8%, to $327.3 million was offset by a decrease in average
yield to 6.39% from 7.63%. The increase in the average balance of investment
securities was primarily due to the investment of funds generated from the
aforementioned deposit and borrowing growth. The decrease in the taxable
equivalent yield was a result of purchasing investment securities in a lower
interest rate environment.
Interest income on interest-earning deposits increased by $563,000, or 23.4%, to
$3.0 million as the increase in the average balance to $299.1 million from $95.3
million was partially offset by a decrease in the average yield to 1.33% from
3.37%. The increase in average balance is primarily because the Company has
experienced difficulty in deploying the significant inflow of funds from deposit
growth, borrowings and loan payments into loans and investments. The decrease in
the average yield is a result of the continued decline in short-term market
rates over the last eighteen months.
22
INTEREST EXPENSE
Total interest expense decreased by $9.6 million, or 8.5%, to $104.3 million
primarily due to a decrease in the average cost of interest-bearing liabilities
to 3.28% from 4.32% which was partially offset by an increase in the average
balance of interest-bearing liabilities of $721.0 million, or 20.5%, to $4.239
billion. The decrease in the cost of funds resulted primarily from the Company's
depositors moving funds from certificates of deposit, to savings and insured
money fund accounts, which typically have lower rates than certificates of
deposit. Also, the Company was able to lower its average cost of borrowed funds
by securing long-term fixed-rate borrowings from the FHLB at favorable interest
rates. The increase in the average balance of interest-bearing liabilities
resulted primarily from an increase of $498.5 million, or 15.5%, in the average
balance of deposits, mainly attributed to the growth of existing offices along
with new office openings and to lesser extent, acquisitions. Average borrowed
funds and trust preferred securities also increased by $166.1 million, or 63.6%,
and $56.4 million, respectively, as the Company secured long-term sources of
funds at favorable interest rates.
NET INTEREST INCOME
Net interest income increased by $12.8 million, or 13.4%, on a taxable
equivalent basis, to $108.3 million compared to $95.5 million. This increase in
net interest income was attributable to the combination of the growth of the
Company, both internally and through acquisitions, coupled with an increase in
interest rate spread to 3.05% from 3.04%. The increase in spread resulted from
the cost of funds on interest bearing liabilities decreasing by more than the
yield on interest earning assets in response to lower market interest rates.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased by $1.6 million, or 34.4%, to $6.1
million from $4.5 million in the same period last year. Management analyzes the
allowance for loan losses as described in the section entitled "Allowance for
Loan Losses." The provision that is recorded is sufficient, in management's
judgement, to bring this reserve to a level that reflects the risk inherent in
the Company's loan portfolio relative to loan mix, economic conditions and
historical loss experience. As part of this analysis, management considered the
increase in net charge-offs for the period, the average growth of the loan
portfolio of $245.5 million and the increase in nonperforming loans of $6.6
million, or 41.2%, to $22.7 million at March 31, 2003 from $16.1 million at
March 31, 2002.
NONINTEREST INCOME
Noninterest income increased by $6.9 million, or 52.6%, to $20.1 million from
$13.2 million in the same period last year. Fee income associated with loans and
deposits increased by $1.2 million, or 14.1%, to $10.1 million for the
nine-month period primarily due to the growth of those portfolios. Trust and
other financial services income increased by $951,000, or 58.0%, to $2.6 million
primarily as a result of the additional fee income contributed by Boetger and
Associates, an actuarial and retirement plan services company acquired on July
1, 2002. The Company's gain on sale of loans increased by $1.0 million, to $1.6
million, as the Company sold most of the fixed-rate mortgage loans originated
through its wholesale lending business while retaining the rights to service
those loans. The Company is also realizing the benefit of purchasing $60 million
of insurance on the lives of its directors and a certain group of key employees
during the fourth fiscal quarter of the previous year. The increase in the cash
surrender value of these policies amounted to
23
$2.4 million for the first nine months of the current year. These investment
returns are used to help offset the increase in employee benefit costs such as
healthcare.
NONINTEREST EXPENSE
Noninterest expense increased by $10.3 million, or 16.5%, to $72.6 million from
$62.3 million for the same period last year. All major expense categories
increased primarily as a result of the significant growth of the Company's
retail network over the past twelve months, the expansion of its investment
management, trust and brokerage services, as well as the addition of new
products and services. The Company has added 12 retail offices to its network
over the past twelve months through new office openings and acquisitions.
Management believes, however, that despite these increases in costs due to
expansion, progress has been made in controlling operating expense.
INCOME TAXES
The provision for income taxes for the nine months ended March 31, 2003
increased by $1.2 million, or 9.9%, compared to the same period last year. This
increase is primarily due to an increase in income before income taxes and
cumulative effect of accounting change of $6.1 million, or 15.4%.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure, an amendment of FASB Statement No. 123" ("SFAS 148")
during December 2002. This Statement amends FASB Statement No. 123 to provide
alternative methods of transition for voluntary change to the fair value based
method of accounting for stock-based employee compensation. This Statement also
amends the disclosure requirements of Statement 123 to require prominent
disclosure on both annual and interim financial statements about the method of
accounting for stock-based compensation and the effect of the method used on
reported results. The transition alternatives of SFAS 148 are available for
fiscal years beginning after December 15, 2003 and, if the fair value provisions
of SFAS 123 are adopted, the effect on the Company's financial statements is
contingent on the transition provision elected. The pro forma disclosure
requirements are included in the notes to the consolidated financial statements.
In November 2002 the FASB issued Interpretation No. 45 "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). This interpretation elaborates on the
existing disclosures to be made by a guarantor in its financial statements about
its obligations under certain guarantees that it has issued ("disclosure
requirements"). This interpretation also clarifies that a guarantor is required
to recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee ("recognition and measurement
provisions"). The initial recognition and initial measurement provisions of FIN
45 are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The recognition and measurement provisions are not expected
to have a material effect on the Company. The disclosure requirements in FIN 45
are effective for financial statements of interim and annual periods ending
after December 15, 2002. The Company's disclosure of guarantees is included in
Note 7 to the Notes to Unaudited Consolidated Financial Statements.
24
AVERAGE BALANCE SHEET
(Dollars in Thousands)
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods presented. Average balances are calculated using
daily averages.
Three Months Ended March 31,
2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Average Interest Avg. Average Interest Avg.
Balance Yield/ Balance Yield/
Cost Cost
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Interest earning assets:
Loans receivable (a) (b) (d) $3,208,639 $ 57,021 7.11% $ 2,962,873 $ 57,181 7.72%
Mortgage-backed securities (c) $ 806,267 $ 7,099 3.52% $ 512,044 $ 6,491 5.07%
Investment securities (c) (d) (e) $ 352,514 $ 5,448 6.18% $ 293,072 $ 4,931 6.73%
FHLB stock $ 34,116 $ 273 3.20% $ 22,499 $ 250 4.44%
Other interest earning deposits $ 320,795 $ 889 1.11% $ 130,658 $ 816 2.50%
---------- --------- ----- ----------- --------- -----
Total interest earning assets $4,722,331 $ 70,730 5.99% $ 3,921,146 $ 69,669 7.11%
Noninterest earning assets (f) $ 312,065 $ 223,074
---------- -----------
TOTAL ASSETS $5,034,396 $ 4,144,220
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing liabilities:
Savings accounts $ 847,522 $ 4,424 2.09% $ 591,773 $ 3,853 2.60%
Now accounts $ 595,551 $ 1,737 1.17% $ 388,347 $ 1,183 1.22%
Money market demand accounts $ 530,539 $ 2,761 2.08% $ 355,408 $ 2,231 2.51%
Certificate accounts $1,922,331 $ 17,482 3.64% $ 1,931,302 $ 21,918 4.54%
Borrowed funds (g) $ 484,935 $ 5,518 4.55% $ 255,003 $ 3,380 5.30%
Guaranteed preferred beneficial interests in the
Company's junior subordinated debentures $ 99,000 $ 1,888 7.63% $ 99,000 $ 1,926 7.78%
----------- --------- ----- ------------ --------- -----
Total interest bearing liabilities $4,479,878 $ 33,810 3.02% $ 3,620,833 $ 34,491 3.81%
Noninterest bearing liabilities $ 212,872 $ 224,409
---------- -----------
Total liabilities $4,692,750 $ 3,845,242
Shareholders' equity $ 341,646 $ 298,978
---------- -----------
TOTAL LIABILITIES AND EQUITY $5,034,396 $ 4,144,220
========== ===========
Net interest income/ Interest rate spread $ 36,920 2.97% $ 35,178 3.30%
Net interest earning assets/ Net interest margin $ 242,453 3.13% $ 300,313 3.59%
Ratio of interest earning assets to
interest bearing liabilities 1.05X 1.08X
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Average gross loans receivable includes loans held as available-for-sale and
loans placed on nonaccrual status.
(b) Interest income includes accretion/amortization of deferred loan fees/
expenses.
(c) Average balances do not include the effect of unrealized gains or losses on
securities held as available-for-sale.
(d) Interest income on tax-free investment securities and tax-free loans is
presented on a taxable equivalent basis.
(e) Average balances include FNMA and FHLMC stock.
(f) Average balances include the effect of unrealized gains or losses on
securities held as available-for-sale.
(g) Average balances include FHLB borrowings, securities sold under agreements
to repurchase and other borrowings.
25
RATE/ VOLUME ANALYSIS
(Dollars in Thousands)
The following tables represent the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate
(changes in rate multiplied by prior volume), (iii) changes in rate-volume
(changes in rate multiplied by changes in volume), and (iv) the net change.
Three months ended March 31, 2003 and 2002
- ------------------------------------------------------------------------------------------------------
RATE/ NET
RATE VOLUME VOLUME CHANGE
- ------------------------------------------------------------------------------------------------------
Interest earning assets:
Loans receivable $ (4,527) $ 4,743 $ (376) $ (160)
Mortgage-backed securities $ (1,983) $ 3,730 $ (1,139) $ 608
Investment securities $ (402) $ 1,000 $ (81) $ 517
FHLB stock $ (70) $ 129 $ (36) $ 23
Other interest-earning deposits $ (454) $ 1,188 $ (661) $ 73
-------- -------- -------- --------
Total interest-earning assets $ (7,436) $ 10,790 $ (2,293) $ 1,061
Interest-bearing liabilities:
Savings accounts $ (764) $ 1,665 $ (330) $ 571
Now accounts $ (50) $ 631 $ (27) $ 554
Money market demand accounts $ (381) $ 1,099 $ (188) $ 530
Certificate accounts $ (4,354) $ (102) $ 20 $ (4,436)
Borrowed funds $ (480) $ 3,049 $ (431) $ 2,138
Guaranteed preferred beneficial
interests in the Company's junior
subordinated debentures $ (38) $ -- $ -- $ (38)
-------- -------- -------- --------
Total interest-bearing liabilities $ (6,067) $ 6,342 $ (956) $ (681)
-------- -------- -------- --------
Net change in net interest income $ (1,369) $ 4,448 $ (1,337) $ 1,742
======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------
26
AVERAGE BALANCE SHEET
(Dollars in Thousands)
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods presented. Average balances are calculated using
daily averages.
Nine Months Ended March 31,
2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Average Interest Avg. Average Interest Avg.
Balance Yield/ Balance Yield/
Cost Cost
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS:
- -------
Interest earning assets:
Loans receivable (a) (b) (d) $3,154,814 $ 173,285 7.32% $ 2,909,313 $ 171,156 7.84%
Mortgage-backed securities (c) $ 668,233 $ 19,966 3.98% $ 509,313 $ 20,286 5.31%
Investment securities (c) (d) (e) $ 327,267 $ 15,694 6.39% $ 256,014 $ 14,650 7.63%
FHLB stock $ 28,174 $ 690 3.27% $ 22,499 $ 959 5.68%
Other interest earning deposits $ 299,149 $ 2,974 1.33% $ 95,265 $ 2,411 3.37%
---------- --------- ---- ----------- --------- ----
Total interest earning assets $4,477,637 $ 212,609 6.33% $ 3,792,404 $ 209,462 7.36%
Noninterest earning assets (f) $ 308,897 $ 213,266
---------- -----------
TOTAL ASSETS $4,786,534 $ 4,005,670
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing liabilities:
Savings accounts $ 781,049 $ 13,623 2.33% $ 511,427 $ 11,097 2.89%
Now accounts $ 518,754 $ 4,884 1.26% $ 383,860 $ 3,529 1.23%
Money market demand accounts $ 480,709 $ 8,579 2.38% $ 281,229 $ 6,425 3.05%
Certificate accounts $1,931,810 $ 56,318 3.89% $ 2,037,341 $ 79,922 5.23%
Borrowed funds (g) $ 427,248 $ 15,149 4.73% $ 261,101 $ 10,463 5.34%
Guaranteed preferred beneficial interests in the
Company's junior subordinated debentures $ 99,000 $ 5,733 7.72% $ 42,648 $ 2,488 7.78%
---------- --------- ---- ----------- --------- ----
Total interest bearing liabilities $4,238,570 $ 104,286 3.28% $ 3,517,606 $ 113,924 4.32%
Noninterest bearing liabilities $ 215,412 $ 198,894
---------- -----------
Total liabilities $4,453,982 $ 3,716,500
Shareholders' equity $ 332,552 $ 289,170
---------- -----------
TOTAL LIABILITIES AND EQUITY $4,786,534 $ 4,005,670
========== ===========
Net interest income/ Interest rate spread $ 108,323 3.05% $ 95,538 3.04%
Net interest earning assets/ Net interest margin $ 239,067 3.23% $ 274,798 3.36%
Ratio of interest earning assets to
interest bearing liabilities 1.06X 1.08X
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Average gross loans receivable includes loans held as available-for-sale and
loans placed on nonaccrual status.
(b) Interest income includes accretion/amortization of deferred loan fees/
expenses.
(c) Average balances do not include the effect of unrealized gains or losses on
securities held as available-for-sale.
(d) Interest income on tax-free investment securities and tax-free loans is
presented on a taxable equivalent basis.
(e) Average balances include FNMA and FHLMC stock.
(f) Average balances include the effect of unrealized gains or losses on
securities held as available-for-sale.
(g) Average balances include FHLB borrowings, securities sold under agreements
to repurchase and other borrowings.
27
RATE/ VOLUME ANALYSIS
(Dollars in Thousands)
The following tables represent the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate
(changes in rate multiplied by prior volume), (iii) changes in rate-volume
(changes in rate multiplied by changes in volume), and (iv) the net change.
Nine months ended March 31, 2003 and 2002
- -------------------------------------------------------------------------------------------------------
RATE/ NET
RATE VOLUME VOLUME CHANGE
- -------------------------------------------------------------------------------------------------------
Interest earning assets:
Loans receivable $(11,356) $ 14,443 $ (958) $ 2,129
Mortgage-backed securities $ (5,068) $ 6,330 $ (1,582) $ (320)
Investment securities $ (2,373) $ 4,077 $ (660) $ 1,044
FHLB stock $ (408) $ 242 $ (103) $ (269)
Other interest-earning deposits $ (1,464) $ 5,160 $ (3,133) $ 563
-------- -------- -------- --------
Total interest-earning assets $(20,669) $ 30,252 $ (6,436) $ 3,147
Interest-bearing liabilities:
Savings accounts $ (2,177) $ 5,851 $ (1,148) $ 2,526
Now accounts $ 85 $ 1,240 $ 30 $ 1,355
Money market demand accounts $ (1,406) $ 4,557 $ (997) $ 2,154
Certificate accounts $(20,527) $ (4,140) $ 1,063 $(23,604)
Borrowed funds $ (1,205) $ 6,658 $ (767) $ 4,686
Guaranteed preferred beneficial
interests in the Company's junior
subordinated debentures $ (18) $ 3,287 $ (24) $ 3,245
-------- -------- -------- --------
Total interest-bearing liabilities $(25,248) $ 17,453 $ (1,843) $ (9,638)
-------- -------- -------- --------
Net change in net interest income $ 4,579 $ 12,799 $ (4,593) $ 12,785
======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------
28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a savings bank holding company, the Company's primary market risk is interest
rate risk. Interest rate risk is the sensitivity of net interest income to
variations interest rates over a specified time period. The sensitivity results
from differences in the time periods in which interest rate sensitive assets and
liabilities mature or reprice. The Company attempts to control interest rate
risk by matching, within acceptable limits, the repricing periods of its assets
and liabilities. Because the Company's interest sensitive liabilities typically
have repricing periods or maturities of short duration, the Company has
attempted to shorten the maturities of its assets by emphasizing the origination
of short-term, fixed-rate consumer loans, one-to-four family residential
mortgage loans with terms of fifteen years or less and adjustable rate mortgage
loans, consumer loans and commercial loans. In addition, the Company has
purchased shorter term or adjustable-rate investment securities and
adjustable-rate mortgage-backed securities.
The Company has an Asset/ Liability Committee consisting of several members of
senior management which meets monthly to review market interest rates, economic
conditions, the pricing of interest earning assets and interest bearing
liabilities and the Company's balance sheet structure. On a quarterly basis,
this Committee also reviews the Company's interest rate risk position.
The Company also has a Risk Management Committee comprised of certain members of
the Board of Directors which meets quarterly and reviews interest rate risks and
trends, the Company's interest sensitivity position, the Company's liquidity
position and the market risk inherent in the Company's investment portfolio.
In an effort to assess market risk, the Company utilizes a simulation model to
determine the effect of immediate incremental increases and decreases in
interest rates in net interest income and the market value of the Company's
equity. Certain assumptions are made regarding loan prepayments and decay rates
of passbook and NOW accounts. Because it is difficult to accurately project the
market reaction of depositors and borrowers, the effect of actual changes in
interest on these assumptions may differ from simulated results. The Company has
established the following guidelines for assessing interest rate risk:
Net income simulation. Given a parallel shift of 2% in interest rates, the
estimated net interest may not decrease by more than 20% within a one-year
period.
Market value of equity simulation. The market value of the Company's equity is
the present value of the Company's assets and liabilities. Given a parallel
shift of 2% in interest rates, the market value of equity may not decrease by
more than 50% of total shareholders' equity.
The following table illustrates the simulated impact of a 1% or 2% upward or 1%
downward movement in interest rates on net income, return on average equity,
earnings per share and market value of equity. Given the low interest rate
environment that existed in the current period, the impact of a 2% downward
shift is not shown in the table. This analysis was prepared assuming that
interest-earning asset levels at March 31, 2003 remain constant. The impact of
the rate movements was computed by simulating the effect of an immediate and
sustained shift in interest rates over a twelve-month period from March 31, 2003
levels.
29
- -----------------------------------------------------------------------------------------------------------------------
Increase Decrease
------------------ ------------------
Parallel shift in interest rates over the next 12 months 1.0% 2.0% 1.0% 2.0%
---- ---- ---- ----
Projected percentage increase/ (decrease) in net income 13.4% 14.8% 2.4% NM
Projected increase/ (decrease) in return on average equity 1.7% 1.8% 0.3% NM
Projected increase/ (decrease) in earnings per share $0.13 $0.15 $0.02 NM
Projected percentage increase/ (decrease) in market value of equity (7.4)% (27.6)% (9.4)% NM
- -----------------------------------------------------------------------------------------------------------------------
NM - Not meaningful
The figures included in the table above represent projections which were
computed based upon certain assumptions including prepayment rates and decay
rates which cannot be accurately predicted. There are no assurances that these
assumptions and the resultant impact on the Company's financial ratios will
approximate the figures presented above.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision of and the participation of the Company's management,
including the Chief Executive Officer and Chief Financial Officer, the Company
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures (as defined in Rule 13a-14(c) under the Exchange Act) as
of a date (the "Evaluation Date") within 90 days prior to the filing date of
this report. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, as of the Evaluation Date, these disclosure
controls and procedures are effective in timely alerting them to the material
information relating to the Company (or the consolidated subsidiaries) required
to be included in the Company's periodic SEC filings.
There were no significant changes in the Company's internal controls during the
period covered by this report or in other factors that could significantly
affect these controls subsequent to the date of the most recent evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are subject to a number of asserted and
unasserted claims encountered in the normal course of business. Management
believes that the aggregate liability, if any, that may result from such
potential litigation will not have a material adverse effect on the Company's
financial statements.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT 11: STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(Dollars in thousands, except per share amounts)
Three Months Three Months
Ended Ended
March 31, 2003 March 31, 2002
Reported net income $ 10,196 $ 10,078
Deduct: Cumulative effect of accounting change $ -- $ --
-------------- --------------
Net income before cumulative effect of accounting change $ 10,196 $ 10,078
Weighted-average common shares outstanding (basic) 47,651,250 47,500,025
Common stock equivalents due to effect of stock options 547,151 519,760
-------------- --------------
Total weighted-average common shares and equivalents (diluted) 48,198,401 48,019,785
BASIC EARNINGS PER SHARE:
Reported net income $ 0.21 $ 0.21
Deduct: Cumulative effect of accounting change $ 0.00 $ 0.00
-------------- --------------
Net income before cumulative effect of accounting change $ 0.21 $ 0.21
============== ==============
DILUTED EARNINGS PER SHARE:
Reported net income $ 0.21 $ 0.21
Deduct: Cumulative effect of accounting change $ 0.00 $ 0.00
-------------- --------------
Net income before cumulative effect of accounting change $ 0.21 $ 0.21
============== ==============
31
Nine Months Nine Months
Ended Ended
March 31, 2003 March 31, 2002
Reported net income $ 31,927 $ 29,325
Deduct: Cumulative effect of accounting change $ -- $ 2,237
-------------- --------------
Net income before cumulative effect of accounting change $ 31,927 $ 27,088
Weighted-average common shares outstanding (basic) 47,608,108 47,459,915
Common stock equivalents due to effect of stock options 521,297 484,227
-------------- --------------
Total weighted-average common shares and equivalents (diluted) 48,129,405 47,944,142
BASIC EARNINGS PER SHARE:
Reported net income $ 0.67 $ 0.62
Deduct: Cumulative effect of accounting change $ 0.00 $ 0.05
-------------- --------------
Net income before cumulative effect of accounting change $ 0.67 $ 0.57
============== ==============
DILUTED EARNINGS PER SHARE:
Reported net income $ 0.66 $ 0.61
Deduct: Cumulative effect of accounting change $ 0.00 $ 0.05
-------------- --------------
Net income before cumulative effect of accounting change $ 0.66 $ 0.56
============== ==============
32
(b) EXHIBIT 99.1: CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned officers of Northwest Bancorp, Inc. (the "Company") hereby
certify that, to the best of their knowledge:
1. the Company's quarterly report on Form 10-Q for the period ended March
31, 2003 (the "Report") fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934, and
2. that, as of the date of this statement, the information contained in
the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
The purpose of this statement is solely to comply with Title 18, Chapter 63,
Section 1350 of the United States Code, as amended by Section 906 of the
Sarbanes-Oxley Act of 2002.
May 15, 2003 /s/ William J. Wagner
- -------------------- -------------------------------------------------
Date William J. Wagner
President and Chief Executive Officer
May 15, 2003 /s/ William W. Harvey, Jr.
- -------------------- -------------------------------------------------
Date William W. Harvey, Jr.
Senior Vice President and Chief Financial Officer
33
(c) REPORTS ON FORM 8-K
During the third fiscal quarter, the Company filed or furnished the following
Current Reports on Form 8-K:
(1) A report dated January 21, 2003, which included, under Items 5 and 7, the
Company's press release announcing fiscal year 2003 second quarter results
of operations.
(2) A report dated January 30, 2003, which included, under Items 5 and 7,
Northwest Bancorp, MHC's press release announcing the completion of their
acquisition of Leeds Federal Bankshares, Inc.
(3) A report dated March 12, 2003, which included, under Items 5 and 7, the
Company's press release announcing entering into a definitive agreement to
acquire First Bell Bancorp, Inc.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
NORTHWEST BANCORP, INC.
Date: May 15, 2003 By: /s/ William J. Wagner
--------------------- ------------------------------------------
William J. Wagner
President and Chief Executive Officer
Date: May 15, 2003 By: /s/ William W. Harvey, Jr.
--------------------- -------------------------------------------
William W. Harvey, Jr.
Senior Vice President and
Chief Financial Officer
35
CERTIFICATION PURSUANT TO RULE 13a-14
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, William J. Wagner, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Northwest Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statements of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based in
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
May 15, 2003 /s/ William J. Wagner
- ---------------------------- ---------------------------------------------
Date William J. Wagner
President and Chief Executive Officer
36
CERTIFICATION PURSUANT TO RULE 13a-14
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, William W. Harvey, Jr., Senior Vice President, Finance and Chief Financial
Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Northwest Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statements of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based in
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
May 15, 2003 /s/ William W. Harvey, Jr.
- ----------------------------- -----------------------------------------------
Date William W. Harvey, Jr.
Senior Vice President, Finance and
Chief Financial Officer
37